1. Trade and Foreign Direct Investment nexus in West Africa: Does export categories matter? Chukwuka Onyekwena a, Idris Ademuyiwa a and Eberechukwu Uneze ab a Centre for the Study of the Economies of Africa (CSEA), Nigeria. b Baze University, Abuja, Nigeria

2. Trade and FDI relationship The relationship between trade and FDI has been debated Both Economic and international business theories show that FDI and trade are substitutes, particularly when FDI is horizontal; but when FDI is vertical, trade and FDI can coexist. Multi-product firms also allow for the coexistence of trade and FDI – alternate between foreign investment and trade for different goods. FDI for good A; trade for good B.

3. Trade and FDI relationship contd. Third party effect: FDI from a particular country to a host country, promotes or debars trade between that host country and other countries. This can yield a combination of complementary and substitution relationship between them. Available data on FDI and trade not sufficient to capture the complex interplay – empirical results differ across literature The lack of consensus points to the need for evidence to support policies on trade and FDI promoti on

4. Contribution Literature has been focused on the effect of outward FDI on home country’s export of intermediate goods or host country’s export of final goods, with little attention given to the effect of inward FDI on host country’s exports – this study fills the void. The present study presents the “commodity-proximity” model which explains how multinational’s presence in upstream production in resource-abundant countries can stimulate the extraction or processing of raw materials into intermediate goods for onward exporting to source countries for downstream production. Specifically, the present study investigates the effect of inward FDI on ECOWAS exports to the EU – first to investigate FDI- Trade relationship in natural resource rich countries.

5. Stylized facts – ECOWAS-EU trade 90 percent of trade in the ECOWAS region is with partners outside. BRICS, EU-28, and FTAA constitutes 70% of the ECOWAS total exports. EU accounts for over 30% of the regions exports, as at 2013, a decline from 43% in 1995. Decline attributable to the Euro crisis and the emergence of new competitors in global trade – BRICS. The share of BRICS in ECOWAS’s exports rose from less than 10% in 1995 to about 25% in 2013.

6. Stylized facts – ECOWAS-EU trade contd. Broad Economic Categories (BEC) show ECOWAS trade across different export categories. Within ECOWAS, primary goods export remain dominant, albeit declining from 86% in 2000 to 66% in 2010. Within the same period, the share of intermediate goods exports increased from 10% to 30%, while final goods export remain steady at 5%.

7. Fig 2: ECOWAS Exports to selected EU countries in terms of BEC Fig 1: Shares of Economic Groups in ECOWAS’ Exports, 1995 to 2013

8. Theoretical foundations Earlier trade and FDI models elaborate the substitutability argument - Mundel (1957), Kindleberger, 1969. International business theories also support substitutability of FDI and trade - Dunning (1977) shows the motives for serving a foreign market in the OLI eclectic theory. New trade theory led to the adjustment of the theory of multinational corporations: Markusen (1984) – Horizontal FDI; Helpman (1984) – Vertical FDI

9. Theoretical foundations contd. Categorization of FDI into vertical and horizontal is key to explaining the coexistence of FDI and trade. Markusen (1997, 2002) vertical model show that the parent firm in a skilled labour abundant country exports intermediate goods and intangible assets to affiliates in the host country. The intermediate goods usually consist of parts and components which utilizes high-skill labour in the upstream, while the assembly of final goods is based in the low- skill host country. The present study presents the “commodity-proximity” model – an entirely different configuration – major departure from previous models – abundance of natural resources plays a key role – “reverse” Markusen- type vertical FDI and trade model – Upstream production in the host country – involves primary goods extraction and mild processing – fits into the West African FDI and export pattern

10. MNC parent – upstream MNC affiliate - downstream Export of intermediate goods HomeAbroad Sale of final goods in host country Export of final goods to source country Fig 3: Vertical specialization (Markusen 1997, 2002)

11. Fig 4: Commodity proximity Vertical FDI – Reverse “Markusen- Type” MNC affiliate – upstream (unskilled labour abundant) MNC parent – downstream (skilled labour abundant) Home (EU) Abroad (ECOWAS) Export of primary/ semi processed intermediate goods Transfer of knowledge based assets

12. Commodity proximity model Two scenarios are plausible: First case: Resource-seeking multinationals engage mainly in the extraction of resources and export them to the source country where other stages of production takes place. The upstream production is generally capital intensive, and the labour component is usually lower skilled than the downstream Second case – multinational presence in upstream production can drive both extraction and subsequent processing into intermediate goods, which are exported for further processing in the downstream of the source country – product design, marketing, and distribution

13. Empirical model Aim – to investigate the relationship between inward FDI into ECOWAS countries and the bilateral trade with EU countries Gravity model is appropriate empirical model (Clausing, 2000; Amiti and Wakeline, 2003; Mullen and William 2011) The present study augments the conventional Gravity model to control for multilateral trade resistance.

14. Empirical model contd.

15. Variable/Symbol Description A-priori expectation EXPORTtotal exports positive GDPSource and partner countries nominal GDP positive DistBilateral distance between the two partners (distance between the major port cities) negative LANGdummy variable that capture the sharing of common language positive DPCdifferences in per capita income between the two trading partners – proxy for differences in relative factor endowments positive FDI Inward Foreign Direct investment in the host countryComplementary – Positive ; Substitutes – Negative Nations dummies for all trade flows involving a particular nation – to control for multilateral resistance Year dummies to control for the correlation that may exist between the resistance term and the included variables Table 1: Variable Description

16. Table 2 Data Description DataSource Bilateral exports from 10 ECOWAS members to 7 EU countries for the period 2000-2010, based on Broad Economic Classification s (BEC) UN Comtrade Database Data on bilateral distances and common language CEPII Database Nominal GDP and per capita incomeWorld Development Indicators (WDI) Database FDIUNCTAD Statistics Database

17. Table 3: Empirical Results – Year and country effects Independent Variables Primary ExportsIntermediate Exports Final Exports lnDist-0.725-1.121-1.498** -0.949-1.5870.699 LANG0.592***0.546***0.800*** 0.0940.1620.071 lnDPCI-1.510-1.320-2.99*** -1.075-1.8630.818 lnFDI0.586**-1.431***0.001 0.2290.390-0.168 Constant5.8400.751-0.048 -3.107-5.209-2.277 Adjusted R 2 0.600.350.57 N 649770 718

18. Conclusion Results from the gravity model show that while increased inflow of FDI promotes the export of primary goods from ECOWAS to the EU, it is associated with a reduction in the exports of intermediate goods and has no significant effect on final goods exports. One plausible explanation for this persistent observation is that FDI into the ECOWAS remain resource-seeking We recommend that in order to achieve export diversification and commodity based industrialization, ECOWAS members should align their investment promotion priorities with their industrialization policies

19. Thank You